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Newsletter

Daily Newsletter, Wednesday, 8/3/2016

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Bearish break followed by bullish recovery

by Keene Little

Click here to email Keene Little
Following a tight trading range for almost three weeks it looked like a bearish breakdown with Tuesday's selloff. But today's recovery has the potential to turn the breakdown into a head-fake break and a rally to new highs. However, the bears still have a foothold here and have the potential to drive the market lower Thursday/Friday.

Today's Market Stats

If you're feeling a little whipped by this market, welcome to the club. Tuesday's selloff had it looking like the 3-week trading range was an ending pattern rather than a bullish consolidation pattern. But the selloff on Tuesday has the potential to be the conclusion to the consolidation pattern and today's rally was the start to the next rally to new highs.

Today's economic reports had little effect on the market since they were market neutral. The ADP employment report for July came in about the same as June (179K vs. 176K, revised up from 172K) and the ISM Service for July was 55.5, only a point below the 56.5 for June and in line with expectations for 55.8. The economic reports continue to show weakness with generally weak and weakening numbers. If anything, other than the worry over declining economic numbers and corporate earnings, neither of which support the high valuations of the current stocks prices, today's neutral reports keep the Fed on hold about additional rate increases.

I've long held my opinion that the Fed will not be able to raise rates. They really should not have raised the rate earlier this year but they're feeling trapped in front of the slowing economy and they desperately want some wiggle room. With what's happening in Europe and in the U.S. it's almost impossible to raise rates without having a negative impact on sentiment and in turn the market. The consumer is already in contraction mode.

What concerns the Fed more than anything else at this point is the idea that Wall Street is starting to ignore the Fed and calling them impotent. When the Fed says things are honky-dory and not to worry, the market is starting to see them like other politicians -- they have to say the economy is doing great because they have no available tools to combat the next recession. If consumers start to understand how much things have actually slowed down and they start to worry more they'll simply pull back even further.

If the mighty consumer starts to pull back it will leave the economy even weaker. Companies will sell less, start to lay off workers, reduce their borrowing, invest in less capital equipment and more importantly for market support, they'll reduce stock buybacks, which is arguably one of the largest supporters (if not the largest) of the stock market. With where the Fed is currently situated, they have very little to stop an economic slide and the recession is likely to turn into a longer and more severe recession (depression?).

Wall Street is a current participant with the Fed in the attempt to keep consumers in the dark by telling them everything is fine and that there's nothing to worry about. Wall Street needs investors to stay bullish, especially since smart money needs dumb money to take stock off their hands. Has the 3-week consolidation been a distribution of stock to retail traders? One could easily make that argument in front of the seasonally weak period of the year (August-September).

The current inflation-adjusted P/E ratio for the S&P 500 suggests a fair historical price between 1200 and 1470, which would be a 32%-44% decline from current levels.

All of this is of course not useful for market timers but it does provide a strong reason for caution about any additional upside movement. Keep your stops tight on long positions and think about the fact that it would be better to get stopped out early and then reenter on a recovery rather than get caught in a sudden decline hoping for a big bounce to exit. Very rarely is the market kind to retail traders.


S&P 500, SPX, Weekly chart

For the past three weeks SPX has been stalled underneath a price projection at 2177.67 (it popped above it Monday morning but was immediately rejected from that level). Yesterday it broke down from the 2-1/2 weeks with a tight trading range but today bounced back up into the same range (about 2157-2177) with the close at 2163. That leaves a question mark as to what will happen next and on a weekly basis I see the potential for a rally to at least 2223, which is the 127% extension of the previous decline (May 2015 - February 2016). The bulls stay in control as long as SPX stays above its May 2015 high near 2135, a break of which would signal the top is likely in place, even if it will be for just a larger pullback before heading back up.


S&P 500, SPX, Daily chart

Yesterday's decline for SPX broke below its 20-dma but managed an afternoon bounce to get back above it, now near 2159. Today's rally has it closing above its 20-dma and back inside its recent trading range, which keeps the door open for bulls to launch another rally, one that could take it up to at least 2191 (projection shown on the 60-min chart further below). The bears need to see this bounce finish with a lower high followed by a break below yesterday's low at 2147.58, which would tell us the 2135 support level should be tested next. A break below that level would be a stronger indicator that the top is in at least for now.

Key Levels for SPX:
- bullish above 2178
- bearish below 2108


S&P 500, SPX, 60-min chart

The tight trading range since July 14th can easily be seen on the 60-min chart below. It was looking like either a shallow up-channel or ascending triangle/wedge and depending on how the pattern was interpreted changed whether it was bullish or bearish. Yesterday's breakdown made it look more bearish than bullish but that has been somewhat negated with the recovery back above the uptrend line from July 15th, currently near 2161.50. It might have been just a manipulated rally in the final 15 minutes to create some short covering. If true we'll see an immediate reversal back down Thursday morning, which would leave a head-fake break back into the trading range. But the bullish interpretation of the consolidation pattern calls the decline into yesterday's low as the completion to the correction and now we'll get another leg up. For the rally from June 27th, and as noted on the chart, the projection at 2191 is where the 3rd through 5th waves would equal the 1st wave, which is a common projection for when the 1st wave extends. The other projection at 2210 is where the 5th wave would equal 62% of the 3rd wave, which is another common projection when the 3rd wave is shorter than the 1st (as is true in this case). And then above 2210 is the 2223 extension shown on the weekly chart, giving us a few levels to watch for if the bulls stay in control.


Dow Industrials, INDU, Daily chart

The Dow has been the weaker index since July 20th but the pattern of its pullback was looking like a bullish descending wedge until yesterday's breakdown. At the same time it broke below its descending wedge it also dropped below its May 2015 high at 18351. Thanks to the last minute shove higher into the close it managed to get back above 18351 by 4 points. For all intents and purposes, today's bounce brought the Dow back up for a possible back-test of S/R at 18351 and a selloff on Thursday would leave a bearish kiss goodbye. So obviously the bulls need to thwart the bears from allowing that to happen. The bullish interpretation of the choppy pullback from July 20th is that it's now ready for another rally leg and for now I'm showing the potential to rally up to about 19000 to again back-test its broken uptrend line from February-May, which was last back-tested with the rally up to the July 2oth high.

Key Levels for DOW:
- stay bullish above 18,350
- bearish below 18,000


Nasdaq Composite index, COMPQ, Daily chart

On Monday the Nasdaq rallied above its December 2015 high at 5176.77 (with a high at 5199) and even managed to close above it with a closing price at 5184. But it couldn't hold above that resistance level and dropped back below its March 2000 high, at 5132.52, on Tuesday before closing slightly above it. Today's rally has it now in between the two resistance levels, leaving us guessing which direction it will go from here.

Key Levels for NDX:
- bullish above 5177
- bearish below 5075


Nasdaq Composite index, COMPQ, 60-min chart

Last week I showed the 60-min chart of the Nasdaq to point out a pattern with a slightly narrowing up-channel that suggested we'd see the December 2015 high tested. As you can see, following the test it broken down and fell out of the up-channel/wedge. Today's bounce has it back up near the bottom of the channel, currently near 5168, and could be doing just a back-test and then drop away from there. That's what the bears want to see. The bulls want to see a head-fake break of support followed by a nice short-covering rally back up to new highs. I'm leaning bearish here because of what looks like a small impulsive move down from Monday that's been now followed by a 3-wave bounce correction. This suggests at least another leg down and the only way it can be negated is with a rally above Monday's high at 5199.


Russell-2000, RUT, Daily chart

As with the other indexes, the RUT dropped down to its 20-dma yesterday, at 1200.91, which was also a break below price-level S/R at 1205. Today's bounce has it back above 1205 and might have left a head-fake break of support that will now be followed by another rally leg. But as with the tech indexes, the decline from Monday into Tuesday's low looks like an impulsive 5-wave move down and that suggest the current bounce will be followed by at least one more leg down. The larger bearish pattern supports the idea that we'll get a much more bearish move from here, one that will take the indexes below the June lows. It's too early to tell which side is now in control but the short-term pattern is bearish until negated with a rally above Monday's high at 1224.46.

Key Levels for RUT:
- bullish above 1225
- bearish below 1198


10-year Yield, TNX, Weekly chart

Bonds sold off today, correcting a portion of Tuesday's rally (opposite of the stock market), and that had TNX bouncing back up to its downtrend line from May 31 - July 21, near 1.56%. We could see a continuation lower from here, especially if the stock market sells off and money rotates into the relative safety of Treasuries. But if bonds continue to sell off we could see TNX rally to 1.75% where the bounce off the July 6th low would achieve two equal legs up. Before that level is its downtrend line from November 2015 - May 2016, currently near 1.72%


KBW Bank index, BKX, Daily chart

On Tuesday BKX dropped down to price-level S/R near 66.50 (with a low at 66.56) and its 20-dma at 66.65 (66.90 today). From there it bounced back up today, with a relatively large rally (+1.5%) compared to the broader averages, and banged into its broken 200-dma at 67.82, with a high at 67.90 and a close at 67.89. Its downtrend line from June 2 - July 27 is now near 68.14 so watch that level if tested. A break of its downtrend line would suggest a rally up to at least its longer-term downtrend line from July-December 2015, near 69.80, whereas a break below 66.50 would likely lead to at least a larger pullback if not something more bearish.


Transportation Index, TRAN, Daily chart

The TRAN also fell to support at its 200-dma yesterday, at 7666, with a low at 7622, and bounced today back up to its broken 50-dma at 7716, with a high at 7719 and a close at 7711. That leaves us guessing for now which one is going to hold as support or resistance. The pullback from July 14th looks like a 3-wave correction to the rally and that supports the idea that we're going to see another rally leg kick off (but not a guarantee it will happen). Above 7860 would be a bullish heads up and above 8000 would confirm the bulls are taking it higher. The bearish pattern suggests another leg down, perhaps to the 7500 area, followed by a larger bounce and then strongly lower into September.


U.S. Dollar contract, DX, Weekly chart

The US$ pulled back sharply last week from its downtrend line from December 2015 - January 2016, currently near 97, but so far there's no evidence that it will break down from here. I expect to see continued choppy and whippy price action for the dollar all year and I continue to expect a move up to the top of its trading range near 100 before pulling back again into the end of the year (to then set up the next rally leg).


Gold continuous contract, GC, Weekly chart

Following gold's pullback from July 6 into the low on July 21 it has bounced back up to challenge the July 6th high at 1377.50 (Tuesday's high was 1374.20 and today's was 1373.40). I still like the upside projection at 1417.50 (for two equal legs up from December 2015 and a test of its downtrend line from September 2011 -October 2012) to complete its bounce correction before heading back down. Whether we'll get just a larger pullback or something more bearish will have to be figured out once the pullback/decline gets underway but at least for the short term I don't see much more upside potential for gold than that 1417.50 projection.


Oil continuous contract, CL, Weekly chart

On Monday oil lost support at its 200-dma, currently at 40.62, and today's rally took it back above it with a high at 41.20 and close at 41.17. On the daily chart there are no bullish divergences, suggesting a bounce off this morning's low at 39.19 will be followed by at least a retest of the low, if not lower. The weekly chart shows a break of support at its 50-dma, at 41.46 and the bearish wave count suggests a return to at least the February low at 26.05 and potentially lower. A slowing global economy would be the primary reason for lower prices. But so far the uptrend line on RSI shows the possibility for the pullback from the June 9th high at 51.67 to be just a correction within what will become a larger bounce/rally, especially if MACD turns back up from the zero line. I think that's a lower-probability scenario but one that still needs to be respected.


Economic reports

Thursday's economic reports include unemployment claims data, Challenger Job Cuts and Factory Orders. There are no significant changes expected but Factory Orders for June are expected to decline further from May's -1.0%. Friday will be the big day with the NFP report, which is expected to be down more than 100K from the 287K reported in July (which was up big from June's 37K). With today's ADP report showing very little change from June maybe the market will get a happy surprise with a better-than-expected number on Friday. Of course that would have the market worrying about the Fed getting back on the rate-increase wagon.


Conclusion

For the past three weeks we've been waiting for a tight trading range to break and yesterday it broke down. But today's rally puts several indexes right back up inside the trading range. It's possible yesterday's "breakdown" will turn into a head-fake break and now some buy programs could kick in some short covering that will take the indexes to new highs. There are some short-term patterns for yesterday's decline and today's bounce that suggest the bounce is just a correction to what will become at least a larger pullback and maybe something more bearish.

At this point I'm thinking the higher-odds scenario calls for another leg down for the pullback/decline off Monday's high, which won't be negated until we see a high above the Monday highs. That means the current bounce should be viewed as a shorting opportunity and then if we get another leg down it should be watched carefully for where it would achieve two equal legs down from Monday since that could conclude an a-b-c pullback. If the 2nd leg down (again, assuming we'll get it) exceeds the projection for two equal legs down I would then start thinking more bearishly.

So it's a little early to get too bearish, especially since we don't have confirmation yet that a top is in place. Hopefully the indexes won't stay stuck in the 3-week trading range -- gag me with a spoon if that's what follows. Stay long above Monday's highs but look to play the short side for another leg down and let price lead the way and keep your bias out of what "should" happen from here.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Play It Again Tim

by Jim Brown

Click here to email Jim Brown

Editors Note:

Some seasonal plays come around like clockwork and this is an annual favorite. It is that time of year when Apple shares begin to ramp up into the September launch of their new iPhone. Thanks to CEO Tim Cook for being so predictable.



NEW DIRECTIONAL CALL PLAYS

AAPL - Apple Inc - Company Profile

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, education, and enterprise and government customers worldwide. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, Mac App Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Multiple leaks from vendors now point to an earlier release of the iPhone 7 on September 7th. That is a week earlier than normal and it stems from the iPhone 7 on the 7th. Pre-orders will start on the 9th and the actual first sale date on September 16th. This will give Apple an extra week of sales in Q3 and help boost their revenue for the quarter. I am sure that was also a motive behind the earlier release date. That will help Apple meet earnings and revenue estimates for Q3. Last time around the iPHone 6S and 6S+ did not go on sale until September 25th.

Other leaks confirm Apple is scrapping the 16gb model. The available memory range will no longer be 16/64/126gb but jump to 32/128/256gb. The prices for the 7 are reported to be $649, $749 and $849. The 7 Plus will be $749, $849 and $949. Those numbers roughly equate to a discount of $100 each over the 6s and 6S Plus models because the base memory increment doubled without an increase in price.

Lastly, there are numerous other leaks that suggest Apple is going to announce a brand new iPhone in September 2017 with a massive number of new design features to commemorate the 10th anniversary of the iPhone product. While that will not impact Apple's share price this season it is something to watch in 2017 and we need to get the trade launched immediately after the July earnings.

For this year, Apple shares spiked to $104 on the better than expected earnings. After spending a week consolidating, the shares are starting to move up again. Typically, they rally from early August until the actual announcement then suffer a sell the news event decline. I am recommending October options so there is still some expectation premium left when we exit in early September.

Buy Oct $110 call, currently $2.00, initial stop loss $102.45.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Small Cap Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 rebounded from critical support to lead the broader market higher. The Russell gained .8% and the Dow Transports gained .82%. Those were the two biggest losers on Tuesday and the biggest winners today. The Dow traded in both negative and positive territory most of the day and only rebounded strongly into positive territory in the 30 minutes before the close.

The Dow leaders were mixed with GS, AAPL, DIS, CVX and JPM the biggest gainers. There was no common news thread that lifted the markets higher other than a slightly better than expected ADP Employment report at 175,000 jobs. That was offset by a weaker than expected ISM Services report at 55.5 compared to 56.5 last month and estimates at 56.0.

Volume was mediocre and today appeared to be simply a hiccup on the path to lower lows. However, a continued rise in the Russell 2000 could lead the broader market away from the cliff's edge.



Current Portfolio




Current Position Changes


GIII - G-III Apparel

The long call position was stopped out at $38.50.


HSY - Hershey

The long put position was closed at the open.


AMCX - AMC Networks

The long put position was stopped out at $56.20.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


GIII - G-III Apparel Group -
Company Profile

Comments:

No specific news. Shares dropped to $38.30 at the open after Kate Spade (KATE) missed on earnings and shares fell -18%. I am recommending we reopen this position at the open on Thursday.

BUY Sept $45 Call, currently .60, no stop loss

Original Trade Description: July 30th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. G-III Apparel Group, Ltd. was founded in 1956.

G-III has been on a buying binge the last several years. They are expanding their brands and expanding the marketing of existing brands with license agreements with other companies.

Last week G-III announced the acquisition of the Donna Karan brand from LVMH for $650 million in a combination of cash, stock and notes. Several analysts immediately downgraded the stock saying they paid too much and it would be dilutive to earnings in 2017. The stock crashed from $50 to $38. The Cowen analyst said the price was too high compared to the brand's potential and return on capital from the acquisition.

Donna Karan has a large international presence and G-III is focused on growing its business in the USA. Analysts thought this was the wrong brand at this time. However, G-III believes they can expand the brand globally and especially in the US. G-III Press release I happen to be familiar with it because it was my wife's favorite brand in the 1980s but she had trouble finding it in the US.

I believe G-III will be successful with the brand but we are talking a couple years. We are not going to hold the stock that long. In the short term the stock is oversold and we are going to enter a position to capture a bounce. G-III has a good reputation and they were in a two-month uptrend when the announcement was made. I beleive that trend will return. If the market rolls over investors are going to be looking for stocks that have already been beaten up as potential safe havens. If the market goes higher, eventually investors are going to be looking for stocks that are not over extended. G-III fits the bill on both counts.

Earnings August 31st.

Position 8/1/16 with a GIII trade at $40.75

Closed 8/3/16: Long Sept $45 call @ $1.15, exit .60, -.55 loss.


LL - Lumber Liquidators - Company Description

Comments:

No specific news. The rebound from $14 continued after Tuesday's pause.

We entered this as a long-term position with the November call. I wish the Q2 earnings were better but that is behind us now. We are going to hold the position and hope the pre earnings rally returns.

Original Trade Description: July 7th.

Lumber Liquidators operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. It primarily offers hardwood species, engineered hardwood, laminates, and resilient vinyl flooring; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools. The company also provides in-home delivery and installation services. The company offers its products primarily under the Bellawood brand and Lumber Liquidators name. It primarily serves homeowners, or to contractors on behalf of homeowners. As of December 31, 2015, it operated 366 stores in the United States and 8 stores in Canada.

LL was trashed in March 2015 after a 60 Minutes report that the laminate flooring sourced from China had excessive levels of formaldehyde. Shares dropped from the prior close just under $70 to $10 earlier this year. Sales plummeted and earnings took a dive.

On Friday the company announced that the Consumer Products Safety Committee (CPSC) had closed their investigation and the only concession LL had to make was to not sell laminate flooring made in China. Since they already stopped that practice 13 months ago, it was basically a get out of jail free card. Shares spiked 19% on Friday to $15.78.

The company also reported that they had tested 15,000 homes with that flooring installed and NONE of those homes had chemical levels over the recommended norms. Of those 70,000 homes some 1,300 underwent special testing by a certified laboratory and NONE of those homes tested above safe levels either.

The CPSC also warned about ripping out the existing flooring and replacing it. They said the process of ripping it out would expose homeowners to excess levels of the chemical so that removes the possibility of a massive recall problem by LL.

LL has a class action suit brought by homeowners but with the CPCS saying there is no problem with the installed floor the suit just lost its main reason for existing. I am sure it will continue and they will try to get some damages but proving you have been damaged when there is no problem is going to be a challenge.

LL escaped a massive recall. They will probably settle for peanuts on the class action suit and there were no fines or penalties. They are probably celebrating all weekend at the corporate headquarters.

Now all they have to do is win back the customers. Same store sales have been down 10-13% because of the looming problems. Now that they can claim there never was any problem they can launch a massive advertising campaign and sales should recover. It may be slow at first but they still have a good selection of products at the right prices.

While their troubles may not be completely over they are light years closer to business as usual than they were a week ago. Funds and investors have ignored their stock but with the all clear from the CPSC they should come flooding back in hopes of getting a bargain entry.

Earnings July 27th.

LL shares spiked to $16 on the news back in mid June. They moved sideways until the Brexit crash and lost altitude back to $14. Today's close was a six-month high over that headline spike in June. I believe the stock is poised to go higher now that it is trying to pull out of its yearlong consolidation.

I am going to recommend a longer-term option and suggest we hold over the July 27th earnings. They would be hard pressed to say anything more negative than what the market already expects. The potential for good news and positive guidance is very good.

Position 7/8/16:

Long Nov $18 call @ $2.15. No stop loss because of the cheap option and the longer term.


NVDA - Nvidia - Company Description

Comments:

No specific news. Shares still holding at the highs ahead of earnings next week.

Nvidia was nominated to replace Netflix in the "FANG" acronym. Josh Brown said Nvidia could be the Intel of artificial intelligence, virtual reality and graphics processing.

Original Trade Description: July 19th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Update 7/25/16: Nvidia announced two more high-end graphics cards on July 25th for the professional workplace. These are for professionals that need extremely high graphics rendering like video editors, photographers, CAD software users, etc. The P5000 handles up to 4 monitors with 16gb of embedded GDDR5X memory. The P6000 also handles up to 4 monitors with 24gb of GDDR5X memory. Earnings August 11th.

We were stopped out of the August position last week and I said we would be entering a new position on this stock. I am recommending we enter an October position and hold over earnings on August 11th. Nvidia has everything working for it including a string of recent product announcements and earnings should be good and guidance even better.

This is a risk. We all know what can happen if they disappoint. I believe Nvidia will make new highs, market permitting, and we can go along for the ride.

I am recommending the Oct $60 strike at $1.42 because I believe it will be over $60 by then and $1.42 is not too much to risk to hold over an earnings report.

Position 7/20/16 with a NVDA trade at $54

Long Oct $60 call @ $1.55, no initial stop loss.


TASR - Taser Intl - Company Description

Comments:

No specific news. Earnings on Thursday. Minor decline in a weak market.

Original Trade Description: July 14th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection.

With all the shootings both by police and at police the need to be able to accurately document the events is becoming even more important. The multiple shootings by police and captures on cell phone video only shows one side of the event. If those cops had body cameras to document what they were seeing, hearing and saying, it would go a long way towards making those events less of a flash point if they can present their side of the event.

Since the Dallas shootings, Taser has won orders for more than 1,591 body cameras from the San Jose Police Dept and the Minneapolis Police Dept along with a 5-year subscription to Evidence.com, Taser's cloud based digital evidence management platform. Taser said demand was growing rapidly and they were in discussions with many more departments about their full range of evidence technology.

According to Taser more than 3,500 agencies and departments from 33 major cities now use their cameras.

The Axon body cameras only cost $399 each but the subscription to Evidence.com is $79 for each camera. The city of Chicago bought 2,031 cameras for $810,369. However, the 5-year subscription to Evidence.com was worth $9.63 million in recurring revenue. Earnings August 4th.

Shares spiked to $28.50 after the Dallas shootings and then pulled back to $26.50 after the headlines cooled. The news of the big orders lifted shares back to $27.50 and rising. Taser was already in a strong uptrend and the temporary spike has now been digested and the trend is returning.

I am recommending we buy the Sept $29 call, currently $1.60. If the market rolls over as I expect on Friday we could get a better entry on Monday. I am recommending an entry trigger at $27.80, which is above today's high. If the market opens lower, we will not be triggered and we can reevaluate the entry point for Monday.

Position 7/15/16 with a TASR trade at $27.80

Long Sept $29 call @ $1.49, no initial stop loss.


XBI - Biotech ETF - ETF Profile

Comments:

No specific news. Shares rebounded to a new 6-month high.

Original Trade Description: July 25th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index. The fund is equally weighted unlike the IBB which is market cap weighted.

The biotech sector was crushed back in January when Clinton locked on to high priced drugs as un American and pledged to force companies to sell drugs at reasonable prices. Several other candidates picked up the topic and the sector was trashed. The two remaining candidates have moved on to other issues and Clinton is looking less likely to win. Trump is a businessman and understands companies have to make a profit in order to fund future research. He has made comments about drug prices but he is not expected to actually change anything in that area if elected.

After several false starts the ETF is about to break out to a 6-month high over $60. If the XBI does breakout the next material resistance is $70 and it traded as high as $90 last year before the Valeant disaster.

Fortunately, the XBI is not a stock and does not report earnings so we can hold it through the earnings cycle. Any biotech stocks reporting decent earnings will lift the ETF. I am using the September strike because the next series is December and the options are grossly expensive.

Position 7/26/16: Long Sept $60 call @ $2.41. See portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

AMCX - AMC Networks - Company Description

Comments:

No specific news. We no longer have to worry about earnings on Thursday. Shares spiked $1.58 on no news to stop us out at $56.20 for a minor loss.

Original Trade Description: July 16th.

AMC Networks Inc. engages in the ownership and operation of various cable television's brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The National Networks segment operates five distributed entertainment programming networks under the AMC, WE tv, BBC AMERICA, IFC, and SundanceTV names in high definition and standard definition formats. This segment distributes its networks in the United States through cable and other multichannel video programming distribution platforms, including direct broadcast satellite and platforms operated by telecommunications providers.

RBS says AMCX is a dead man walking. They downgraded the network to "sell" because some of its most popular shows are seeing their ratings walk off a cliff. The previously popular series "The Walking Dead" (TWD) has declined significantly in the ratings with a 40% drop in the 2016 season. The show routinely kills off cast members that have been with the program for years. The finale for the sixth season saw viewership significantly lower than the prior season finale. Spoiler alert, another prominent cast member is not going to make it through the next season opener. The cliff hanger left viewers unsure which one it will be but all the major players are at risk.

The new show that was spun off from TWD was "Fear the Walking Dead" and it barely made it out of the first half of the second season season alive. AMC has said it will air the second half of season 2 starting on August 21st. if viewership does not pick up fast there may not be a season 3.

Another previously popular show "Better Call Saul" saw "strong double digit ratings declines" while viewership on the new shows "Preacher," "Night Manager" and "Feed the Beast" has been lackluster at 50% less than analysts expected.

UBS is also worried that AMC will be shutout of the skinny bundles that will be offered by Hulu in 2017. That would be a further cash drain on AMC.

Earnings August 4th.

Shares dropped -4% to $56.59 on the RBS downgrade on Friday but that could be the start of a larger decline. The 52-week low was $55 in late June. Morgan Stanley cut AMC from buy to neutral in late June. Shares spiked on the 30th after Lions Gate bid for Stars. AMC was thought to be up for grabs if there was further media consolidation. Since that spike shares have traded sideways despite the strongly bullish market. The drop on Friday killed that sideways trend.

Position 7/18/16:

Closed 8/3/16: Long Sept $55 put @ $2.30, exit $1.90, -.40 loss


DIA - Dow Jones ETF - ETF Profile

Comments:

The Dow avoided 8 consecutive days of declines but it was touch and go right up until late afternoon. The minor rebound may have been simply some short term oversold conditions coupled with a rebound in oil prices.

Original Trade Description: August 1st.

The Dow posted another lower low as it fades from the 18,622 intraday high set back on July 20th. The last three days the Dow has traded under support at 18,400 only to rebound back over that level at the close. The 18,350 level is secondary support and today's low was 18,355.

All but six Dow components have reported earnings and there are only two reporting this week. Those are PG and PFE on Tuesday. The Dow is experiencing post earnings depression. After a stock reports earnings there is typically a period where it declines as traders leave that stock in search of something else to trade that has not yet reported.

PG 8/2
PFE 8/2
DIS 8/9
HD 8/16
CSCO 8/17
WMT 8/18

The Dow is very over extended, suffering post earnings depression and heading into the two weakest months of the year, which are seasonal decliners.

Bank of America expects a 10-15% decline over the next two months.

Goldman Sachs said this morning they expect a 5-10% decline. Goldman said, rising uncertainty in the U.S. and globally, negative earnings revisions, decelerating buybacks and overly dovish Fed expectations would send the market lower over the next several months.

Jeffrey Gundlach of DoubleLine with $100 billion under management, said "sell everything" most asset classes are "frothy and nothing here looks good." "Stock investors have entered a world of uber complacency." "Investors seem to have been hypnotized that nothing can go wrong." He expects the next big money to be made on the short side.

Peter Boockcar, chief market analyst at the Lindsey Group, said, "Take off the beer goggles, the markets are dangerous. To me, the U.S. stock market is the most expensive in the world."

According to Bespoke, over the last 20 years the Dow has performed the worst in August of any other month.

However, just because some big names and big banks turn negative on the market, it does not mean it is guaranteed to move lower. Markets tend to move in the direction that will confound the most people at any given time.

I believe we should accept the risk and launch another index short using the Dow ETF (DIA) since it is the weakest in August. The Dow has risk to 18,000 and a breakdown there could take it back to 17,400.

I am going to recommend an October put spread so we can capitalize on any decline that lasts into September. Typically market bottoms are in October. If you do not want to use a spread, I would buy the September $182 puts, currently $2.55. Just remember, once we are into September the premiums will decline sharply.

Position 8/2/16:

Long Oct $182 put @ $3.98, no initial stop loss.
Short Oct $172 put @ $1.73, no initial stop loss.
Net debit $2.25


HSY - Hershey Company - Company Description

Comments:

We closed the position at the open after an unexplained spike in the shares on Tuesday. Of course today there was a big decline after a story making the rounds about why Hershey will never be sold because the trust and the state will not allow it. I have written about that in the past but somebody reposted the gory details and it must have encouraged some owners to exit.

Original Trade Description: July 2nd.

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. It offers chocolate and non-chocolate confectionery products; gum and mint refreshment products comprising chewing gums and bubble gums; pantry items, such as baking ingredients, toppings, beverages, and sundae syrups; and snack items, including spreads, meat snacks, bars and snack bites, and mixes. The company provides its products primarily under the Hersheys, Reeses, Kisses, Jolly Rancher, Almond Joy, Brookside, Cadbury, Good & Plenty, Heath, Kit Kat, Lancaster, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, and Bubble Yum brands, as well as under the Golden Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, and Sofit brands.

Snack maker Mondelez bid roughly $23 billion for Hershey last week and the offer was quickly refused. Hershey has turned down several acquisition offers since 2002. In 2002 the Wrigley company tried to buy it and failed. In 2007 Cadbury also failed. In 2010 the trust prevented Hershey from bidding to buy Cadbury. The problem with acquiring Hershey is that the Hershey Trust Co. owns 81% of the voting stock and 8.4% of the common stock. Nothing will happen unless the trust approves.

The trust was setup in 1909 to benefit the Milton Hershey School for underprivileged children and the community of Hershey Pennsylvania. The trust has built up a $12 billion endowment for the school and is well liked for the good works done around the community.

The board has also said multiple times they do not want to sell the company.

Another factor is the Pennsylvania Attorney General. Any sale would require the approval of the AG under a 2002 state law. He has the power to overrule the trust if he feels any sale would not benefit the citizens of Pennsylvania.

Here is where the challenge comes in. If Mondelez buys the Hershey Company then the trust gets a lump sum of money but that is all they will ever get. Once they spend it the benefit is over. If Hershey stays independent the trust will remain the benefactor of Hershey PA for another century. The profits from Hershey will continue to flow through the trust to the school and other entities to support the community. Hershey pays out about $500 million a year in dividends. The AG is not likely to allow the golden goose to be sold.

I believe this acquisition bid will fail. Mondelez may raise the offer but I doubt the board, trust or AG will accept it. The spike in the stock to $115 will fail and shares will return to the $95-$100 level where they were trading lat week.

This is a speculative position so do not play with money you cannot afford to lose. I am making this a spread because the put options are expensive for obvious reasons.

Earnings July 28th.

Position 7/5/16:

Closed 8/3/16: Long August $110 put @ $5.15, exit $1.97, -$3.18 loss
Closed 8/3/16: Short August $100 put @ $1.52, exit .33, +1.19 gain
Net loss $1.99


IWM - Russell 2000 ETF - ETF Description

Comments:

Big rebound as the Russell spikes 10 points from critical support. We only have 3 weeks left on this option.

Original Trade Description: July 2nd.

The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.

The Russell 2000 is facing strong resistance from 1150-1165. The index actually touched 1,190 in early June but I seriously doubt we will see that level again. The S&P closed right at 2,100 and has strong resistance from 2100-2115. The Dow closed only 72 points under the post Brexit close at 18,011.

We recovered from the post Brexit crash on a combination of equity fund window dressing for the end of the quarter and pension funds rebalancing the ratio of bond to equities. Reportedly they had to buy up to $18 billion in equities.

Now we are at resistance and all those uplifting events are over. The uncertainty over the UK exit still exists and the dollar/pound imbalance will cause a significant number of earnings warnings for Q3.

All the fundamentals point to a weak July and the artificial lift from the end of the quarter buying is over.

Note the volume in SPY and IWM puts for August on Thursday. The far right column is the open interest and the second from the right is the volume traded on Thursday. This is about 3 times the number of calls for the same period. The vast majority of traders are expecting a market decline.

I am recommending we buy puts on the IWM because the premiums are cheaper. I am recommending an entry trigger because we could still move higher ahead of the long weekend. S&P future are down -4 but that could be temporary.

Position 7/5/16 with an IWM trade at $113.95

Long August $112 puts @ $2.62. No initial stop loss.




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